PART 1. FINANCIAL INFORMATION

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1)     Basis of Presentation

      These interim unaudited Consolidated Financial Statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and satisfaction of liabilities in the ordinary course of business, and in accordance with SOP 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"). Accordingly, all pre-petition liabilities subject to compromise are segregated in the unaudited Consolidated Balance Sheets and classified as liabilities subject to compromise and are reported on the basis of the expected amount of the allowed claims in accordance with Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies." Liabilities not subject to compromise (such as secured liabilities and post petition liabilities) are separately classified as current and non-current. Revenues, expenses, realized gains and losses, interest income and provisions for losses resulting from t he reorganization are reported separately as Reorganization items, net, except for those required to be reported as discontinued operations in conformity with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No 144"). Cash used for reorganization items is disclosed separately in the Consolidated Statements of Cash Flows. Additionally, interest expense accrued subsequent to the bankruptcy filing that is deemed to be impaired and unlikely to be paid is excluded from the financial statements.

      These interim unaudited Consolidated Financial Statements include the accounts of Alterra Healthcare Corporation ("Alterra" or the "Company") and our majority owned subsidiaries. All significant intercompany accounts have been eliminated in consolidation. In our opinion, all adjustments (consisting only of normal recurring items) necessary for a fair presentation of these Consolidated Financial Statements have been included. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the full fiscal year. As the accompanying Consolidated Financial Statements do not include all information and notes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America, they should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, for the year ended December 31, 2002, as amended.

2. Chapter 11 Bankruptcy and Restructuring Activities

      In February 2001 our overall cash position had declined to a level which we believed to be insufficient to operate the Company. Accordingly, in February 2001 we retained financial advisors and special reorganization counsel to assist us in evaluating alternatives to restore financial viability. To conserve cash and protect the financial integrity of our operations, beginning in March 2001 we elected not to make selected scheduled debt service and lease payments, of which $2.8 million remains unpaid as of March 31, 2003. As a result, we are in default under several of our principal credit facilities.

      In March of 2001 we began to implement a restructuring plan ("Restructuring Plan"), the principal objectives of which are:

      The principal components of our Restructuring Plan are the disposition of selected assets and the restructuring of our capital structure, including our "senior capital" constituencies comprised principally of our secured indebtedness and leases (operating and capital), our "junior capital" constituencies comprised principally of our convertible pay-in-kind (PIK) debentures, our other convertible subordinated debentures and our equity capitalization, and our remaining joint venture relationships. Discussions with various senior capital structure constituencies commenced in the spring of 2001, and have resulted in a number of restructuring agreements with lenders and lessors with respect to individual credit and lease facilities.

      On January 22, 2003 (the "Petition Date"), we filed a voluntary petition with the Bankruptcy Court to reorganize under Chapter 11 of the Bankruptcy Code (the "Bankruptcy" or the "Bankruptcy Case") under case number 03-10254 (the "Bankruptcy Filing"). None of the Company's subsidiaries or affiliates are included in the Chapter 11 Filing. The Company believes that its Chapter 11 Filing is an appropriate and necessary step to conclude its reorganization initiatives commenced in 2001. The focus of our restructuring efforts in 2001 and 2002 has been portfolio rationalization and the restructuring of our senior financing obligations with our secured lenders and lessors. We believe the Bankruptcy will allow us to complete the restructuring of our senior financing obligations and to commence and complete the restructuring of our junior capital structure, which includes unsecured obligations and claims, our convertible subordinated debentures and our preferred and common st ock.

      At "first day" Bankruptcy hearings held on January 24, 2003, the Bankruptcy Court entered orders granting authority to the Company to, among other things, pay pre-petition and post-petition employee wages, salaries, benefits and other employee obligations, pay pre-petition claims of certain vendors critical to the ongoing operations of the Company, pay pre-petition refunds to residents and continue the existing resident program. The Company remains in possession of its assets and properties and continues to operate its business as a "debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court.

      In conjunction with our Chapter 11 Filing, we secured a $15.0 million debtor-in-possession ("DIP") credit facility from affiliates of certain principal holders of the Company's pay-in-kind securities issued in the summer of 2000. The Bankruptcy Court issued an order approving our borrowing up to $6.5 million under the DIP credit facility on an interim basis on January 24, 2003. On April 9, 2003, the Court issued final approval authorizing the Company to borrow up to the entire $15.0 million of DIP financing, of which only $6.1 million has been borrowed as of March 31, 2003. The Company has incurred $2.7 million in reorganization costs for the three months ended March 31, 2003. These reorganization costs include legal, financial advisory and other professional fees incurred in relation to the reorganization.

      Under the Bankruptcy Code, actions to collect pre-petition indebtedness, as well as most other pending litigation, are stayed and other contractual pre-petition obligations against the Company generally may not be enforced. Unless otherwise addressed during the pendency of the Bankruptcy case, substantially all pre-petition liabilities are expected to be discharged and/or treated pursuant to the terms of a plan of reorganization to be voted upon by appropriate creditor and equity constituencies approved by the Bankruptcy Court.

      Under the Bankruptcy Code, we may assume or reject executory contracts and unexpired leases, subject to the approval of the Bankruptcy Court and our satisfaction of certain other requirements. In the event we choose to reject an executory contract or unexpired lease, parties affected by these rejections may file claims as proscribed by the Bankruptcy Code and/or orders of the Bankruptcy Court. Unless otherwise agreed, the assumption of an executory contract or unexpired lease will require the Company to cure all prior monetary defaults under such executory contract or lease, including all pre-petition liabilities. In this regard, we expect that liabilities that will be classified as "subject to compromise" through the Chapter 11 process will arise in the future as a result of the rejection of additional executory contracts and/or unexpired leases, and from the determination of the Bankruptcy Court (or agreement by parties in interest) of allowed claims for items that we now claim as contingent o r disputed. Conversely, we would expect that the assumption of additional executory contracts may convert liabilities shown on our financial statements as subject to compromise to post-petition liabilities. Due to the uncertain nature of many of the potential claims, we are unable to project the magnitude of such claims with any degree of certainty.

      On February 4, 2003, the Office of the U.S. Trustee for the District of Delaware appointed an official committee of unsecured creditors in our Bankruptcy Case. This committee often takes positions on matters that come before the Court, and is a party with whom the Company will discuss the terms of a plan of reorganization. There can be no assurance that this committee will support the Company's positions in the bankruptcy proceedings or the Company's plan of reorganization, although the parties have agreed on the bid procedures described herein. However, delays regarding both the progress of the case and confirmation of any plan of reorganization may occur based upon issues that could be raised by any of the various creditor constituencies in the case.

      On March 18, 2003 we filed with the Bankruptcy Court schedules of assets and liabilities and statement of financial affairs setting forth, among other things, the assets and liabilities as shown by our books and records at that date, subject to the assumptions contained in certain notes filed in connection therewith. All of the schedules and the statements of financial affairs are subject to further amendment and modification. The deadline for creditors to file proofs of claim with the court-appointed claims agent, Bankruptcy Services, LLC, is July 8, 2003. Differences between amounts scheduled by the Company and claims by creditors will be investigated and resolved in connection with our claims resolution process. The ultimate number and amount of allowed claims is not presently known, and because the settlement terms of such allowed claims are subject to a confirmed plan of reorganization, the ultimate distribution with respect to allowed claims is not presently ascertainable.

      On March 27, 2003, we filed with the Bankruptcy Court a Plan of Reorganization (the "Plan") and a Disclosure Statement Accompanying Plan of Reorganization (the "Disclosure Statement"). Immediately prior to the filing of our Plan and Disclosure Statement, we also filed a motion (the "Bidding Procedures Motion") with the Bankruptcy Court seeking approval of bidding procedures with respect to the solicitation and selection of a transaction contemplating either (i) the sale of capital stock of the reorganized Alterra to be effective and funded upon the confirmation and effectiveness of our Plan (an "Exit Equity Transaction") or (ii) the sale, as a going concern, of all or substantially all of the assets of Alterra to be effective and funded upon the confirmation and effectiveness of our Plan (an "Asset Sale Transaction," together with an Exit Equity Transaction, referred to herein as a "Liquidity Transaction"). The Bankruptcy Court approved our biddin g procedures on April 10, 2003. There can be no assurance that this Plan will be confirmed by the Court or consummated. If the Plan is not accepted by the required number of creditors and equity holders, and the court either terminates or refuses to extend the Company's exclusive right to file and prosecute a Chapter 11 Plan, any party in interest may subsequently file its own plan of reorganization. A plan of reorganization must be confirmed by the Bankruptcy Court, upon certain findings being made by the Bankruptcy Court which are required by the Bankruptcy Code. The Bankruptcy Court may confirm a plan notwithstanding the non-acceptance of the plan by an impaired class of creditors or equity holders if certain requirements of the Bankruptcy Code are met.

      A confirmed plan of reorganization could materially change the amounts reported in the financial statements, which do not give effect to all adjustments of the carrying value of assets or liabilities that might be necessary as a consequence of a plan of reorganization. At this time, it is not possible to predict the effect of the Chapter 11 reorganization on our business, various creditors and security holders or when we will be able to emerge from the Chapter 11.

      The principal components of our restructuring efforts to date and the further restructuring contemplated by the Plan are summarized below.

      Portfolio Rationalization. The Restructuring Plan called for the disposition of 136 of our residences (collectively, the "Disposition Assets") that we determined to be non-strategic for one or more of a variety of reasons, of which 109 residences representing 4,822 resident capacity have either been sold or transferred to a new lessee as of March 31, 2003. In addition, we sold 21 land parcels and transitioned ownership of 3 residences through deed-in-lieu of foreclosure transactions. The disposition of the residences included in the Disposition Assets has been accomplished primarily by actively working with the lenders and lessors to identify new operators and selling assets through an organized sales process. During the quarter ended March 31, 2003 we recognized a loss on disposal of $11.4 million, including a loss of $9.2 million in continuing operations and a loss of $2.2 million in discontinued operations, relating to the sale of 4 residences and the sale leaseback of 25 residences . As of March 31, 2003, approximately $64.1 million is reserved for losses relating to future asset sales, lease terminations and joint venture settlements. A condition to our disposing of the remaining Disposition Assets will be obtaining the consent of the applicable lender or lessor and, in certain cases, the consent of the applicable joint venture partner.

      Restructuring of Our Senior Indebtedness and Leases. The Company has a complex senior capital structure, comprised of more than ten significant multi-residence secured credit facilities and six significant portfolios of operating residences that are leased from real estate investment trusts (REITs). Many of our secured credit facilities are structured to incorporate various so-called "bankruptcy-remote" features (i.e., structures designed to improve the applicable lender's rights and leverage in the event of a bankruptcy of the parent company, Alterra), including structuring the credit facility such that the fee owner of the mortgaged residences and the borrower under the credit facility is a newly formed subsidiary of Alterra whose sole activity is to own and operate the residences financed under that credit facility. The structure of certain of these credit facilities serves to limit the Company's ability to restructure these facilities through a bankruptcy, making it generally prefera ble for the Company to negotiate consensual restructurings with each group of lenders providing secured financing to the Company.

      The Company commenced negotiations with its secured lenders and lessors during 2001. Each separate negotiation has been unique and based on the characteristics of the underlying credit facility, including the credit facility's collateral, terms and structure. Accordingly, our restructuring needs and objectives have varied from one credit facility to the next. Depending on the particular credit facility, we have attempted to reset maturities, address any deficiencies, reset covenants, obtain waivers of default interest and penalties, and secure consent from the lenders and lessors for sales of residences included in their collateral or lease portfolio.

      Secured Lender Negotiations. At the outset of our restructuring, management sought to restructure secured loan facilities that, in management's view, would generate significant deficiency claims (i.e., claims in excess of the value of the applicable mortgage portfolio) in the event the applicable lenders sought to call the loan and foreclose on their collateral. Four credit facilities, representing $214.1 million in aggregate financing at March 31, 2003 (secured by mortgages on 36 residences with an aggregate capacity of 2,586 beds) represent, in our view, significant potential deficiency claims in the range of $82.1 million to $100.1 million. In these negotiations, we sought to limit or eliminate these potential deficiency claims against the Company in exchange for our agreement to cooperate with the applicable lenders to facilitate an orderly transition of ownership (and, in certain cases, management) of the mortgaged residences to the lenders or their designees (through deed-in-lieu of foreclosure transactions or so-called friendly foreclosures). In transitioning ownership of the mortgaged residences to the lenders, we offered to provide interim management services to the lenders with respect to the mortgaged residences. During 2002, we executed definitive agreements of this type with three different lender groups with regard to three "impaired" credit facilities, originally representing $104.2 million of financing secured by 31 residences with an aggregate capacity of 1,520 beds. As a result of refinancings, asset sales and foreclosures during 2002 and 2003, $43.1 million of indebtedness secured by mortgages on nine residences included in these three executed definitive agreements is remaining at March 31, 2003.

      In May 2002, our one remaining significantly "impaired" lender group that provided $171.0 million in aggregate financing (secured by mortgages on 26 residences with an aggregate capacity of 2,154 beds) caused title to all of the stock of our subsidiary that operated these mortgaged residences to be transferred to a third party. Accordingly, we no longer own these residences, although we do currently serve as interim manager for this lender group. As a result of the stock transfer, these residences are no longer consolidated and operations related to these residences through May 31, 2002 are reported as discontinued operations. We have accrued $58.5 million related to our estimated liability associated with our guaranty (including payment of the termination fee due upon full payment of the mortgage obligations). Such liability is included in liabilities subject to compromise at March 31, 2003. The liability associated with our guaranty obligation was calculated as the difference between the fair market va lue of the assets and the underlying mortgage obligations.

      In January 2003, we entered into agreements with this lender group pursuant to which: (i) we have agreed to manage these 26 residences on an interim basis without a management fee, and to cooperate in transitioning management to any successor manager appointed by the credit participants, and (ii) the Company is entitled to be released of its guaranty and other principal obligations (with the exception of certain environmental indemnities) under this financing structure upon the satisfaction of certain conditions, including the payment of $5.7 million of fees to the credit participants on or prior to the confirmation of a plan of reorganization in our Bankruptcy Case.

      In addition to these impaired credit facilities, we are continuing to seek to negotiate amendments and modifications with the applicable lenders with respect to our other principal secured credit facilities in order to, depending on the specific case, reset covenants, obtain consent to sell certain mortgaged residences, secure waivers of prior defaults and, in certain cases, to extend scheduled maturities. These credit facilities represent $308.2 million of financing secured by an aggregate of 93 residences with an aggregate capacity of 4,689 beds as of March 31, 2003. Discussions with certain of these lenders have commenced, and we have executed definitive binding agreements with lenders with respect to $103.2 million of indebtedness secured by 36 residences with an aggregate capacity of 1,689 beds, providing for, among other things, extensions of debt maturities, waivers of prior defaults and amendments of certain covenants. In February 2003 we sold 25 residences with an aggregate capacity of 894 beds, extinguished the related debt, and leased back the facilities under an operating lease agreement. We also refinanced $6.9 million of debt secured by 6 residences with a capacity of 182 beds. As a result of this debt extinguishment and refinancing, we recognized a gain on debt extinguishment of $12.7 million during the quarter ended March 31, 2003. We anticipate that we will need to negotiate restructuring agreements and to secure waivers and amendments with certain of our secured lenders as a condition to confirming our Plan and consummating any Liquidity Transaction.

      REIT Lessor Negotiations. At March 31, 2003, we had six multi-residence portfolios leased from various REITs, including those assets refinanced in February 2003. These portfolios include an aggregate of 225 residences with an aggregate capacity of 9,609 beds. We have entered into restructuring agreements with respect to all of the five multi-residence lease portfolios existing prior to February 2003. These restructurings included the amendment of certain lease covenants and terms and, in three lease facilities, the conversion of individual leases into single master leases. The cash rent due under one lease facility was modified through the application of various deposits held by the landlord to satisfy a portion of the cash rent obligation in the early years of the restructured master lease.

      Restructuring of Junior Capital Structure. As of March 31, 2003, the Company's junior capital structure is comprised of unsecured debt of approximately $455.8 million and equity capitalization consisting of $6.2 million aggregate principal amount of 9.75% Series A Cumulative Convertible Preferred Stock due May 30, 2007 (the "Series A Stock") and 22.2 million shares of Common Stock. The principal components of the Company's unsecured indebtedness as of March 31, 2003 (amounts exclude accrued but unpaid interest) include:

      The outstanding 5.25% Debentures, 7.00% Debentures and 6.75% Debentures (collectively, the "Original Debentures") are subordinated to all other "senior indebtedness" of the Company (as defined in the applicable indenture governing such debentures), and the PIK Debentures are subordinated to all "senior indebtedness" of the Company (as defined in the applicable indentures governing such debentures), other than the Original Debentures. Although defined somewhat differently in the several indentures governing the Original Debentures and the PIK Debentures (collectively, the "Subordinated Debentures"), "senior indebtedness" is defined to generally include indebtedness for borrowed money and other similar obligations of Alterra (other than the other series of Original Debentures).

      All of our Subordinated Debentures are currently in default due to our failure to make coupon payments on the Original Debentures and due to cross default provisions triggered by payment defaults on our secured debt.

      As a result of several notices of default received by the Company with respect to secured indebtedness that by its terms may be accelerated by the applicable lenders, neither we nor the applicable indenture trustees for the Subordinated Debentures are permitted by the subordination provisions of the indentures governing the respective Subordinated Debentures to make any payment or distribution on account of the Subordinated Debentures (other than the payment of PIK coupons on the PIK Debentures). As a result, we did not make cash interest payments on the Original Debentures in 2001, 2002 and January 2003 of $5.5 million, $11.0 million and $5.5 million, respectively. In the event that the Company is dissolved, liquidated or reorganized, all amounts due in payment of the Company's "senior indebtedness" must be paid or provided for before any payment may be made on account of the Subordinated Debentures.

      To the extent that the Company is not able to restructure its capital structure and is forced to liquidate, applicable principles of corporate law (specifically, the liquidation priority of debt over equity and the priority of preferred stock over common stock) and the subordination provisions governing the Subordinated Debentures would dictate that:

• All of our obligations relating to our secured and unsecured loans, including the Unsecured Senior Notes ($11.0 million at March 31, 2003) and any deficiency claims (estimated at $82.1 million to $100.1 million at March 31, 2003 (disregarding the contingent restructuring agreements described above)) relating to our secured loan facilities, would be required to be paid in full before any liquidation proceeds are distributed to the holders of our Subordinated Debentures;

• All obligations relating to the PIK Debentures ($253.9 million including accrued and unpaid PIK dividends at March 31, 2003) would be required to be paid in full before any liquidation proceeds are distributed to the holders of our Original Debentures;

• All liquidation preferences related to our outstanding Series A Preferred Stock (approximately $6.2 million as of March 31, 2003) would be required to be paid in full before any liquidation proceeds are distributed to the holders of our Common Stock.

      In restructuring our junior capital structure, the relative rights in liquidation of our various junior capital constituencies will be a significant factor in determining the extent to which the claims and interests of these various constituencies will need to be modified, exchanged or entitled to any distribution of value as the Company is restructured.

      Our Plan, filed with the Bankruptcy Court on March 27, 2003, contemplates that the Company will conduct a marketing process to solicit and identify the "highest and best" proposal for a Liquidity Transaction, which could involve a sale of equity securities in the reorganized Alterra through an Exit Equity Transaction or a sale of all or substantially all of the assets of Alterra, as a going concern, pursuant to an Asset Sale Transaction. In either case, management believes that the Liquidity Transaction will provide a fair valuation of the reorganized Alterra that will facilitate the completion of the reorganization and will provide a source of liquidity to make distributions of cash, securities or other property to the holders of various junior capital structure constituents, all to the extent that such holders are entitled to a distribution pursuant to the Plan based on applicable principles of bankruptcy and corporate law and the subordination provisions governing the Subordinated Debentures.

      Given the uncertainty as to the outcome of our remaining restructuring negotiations with senior capital constituencies, and given the impact of operative subordination provisions and corporate and bankruptcy law doctrines governing the relative rights of holders of debt and equity interests in the Company, it is very difficult for us to predict what value, if any, various junior capital constituencies will receive in the restructured Alterra. While it is management's intention, to the extent practicable, to seek to restore value to our junior capital, no assurances may be given as to what value, if any, various junior capital constituencies will have in the restructured Company. Based on our current estimates of value, it appears likely that no distribution of value would be made to certain classes of unsecured debt or to any class of capital stock of the Company upon the conclusion of the Bankruptcy Case.

      Joint Venture Arrangements. The Restructuring Plan calls for us to seek to acquire joint venture interests in certain of our residences in order to simplify our capital structure. In many cases, our acquisition of these joint venture interests (or termination of the applicable joint venture's interest in our residences) is necessary for us to satisfy restructuring requirements established by our senior lenders and lessors.

      We have had buy-out or settlement negotiations with investors who currently have interests in an aggregate of 40 joint venture arrangements. As of March 31, 2003, 13 of those joint venture arrangements are associated with residences operating under lease or sublease agreements with the joint venture, while the lease or sublease agreements of the remaining 27 joint venture arrangements have been terminated. No assurance may be given as to whether these negotiations will result in an agreement which enables the Company to acquire 100% of these joint venture entities. If these negotiations fail, the Company's ability to restructure certain of its senior capital financing facilities may be adversely affected.

      As of December 2002, we entered into an agreement with one of our joint venture partners pursuant to which we have agreed to purchase all of the remaining joint venture interests not held by the Company in eight residences and to acquire promissory notes previously issued by the Company aggregating approximately $3.6 million in exchange for the issuance of a 5-year unsecured promissory note for $7.2 million from the reorganized Alterra upon confirmation of our plan of reorganization by the Bankruptcy Court. Accordingly, the consummation of this transaction will be contingent upon, among other things, a successful Chapter 11 reorganization of the Company and Bankruptcy Court approval.

      In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations (SFAS No. 143)." SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Company also records a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation.

      In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Costs covered by SFAS No. 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. Accordingly, the Company will apply the provisions of SFAS No. 146 prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 is not expected to have a material effect on the Company's financial statements.

      In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34." This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company's financial statements. The disclosure requirements are effective for financial statements and interim annual periods ending after December 15, 2002.

      In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123." This Statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002, but have been excluded from these consolidated financial statements as their impact is deemed immaterial.

      In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51." This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interest in variable interest entities obtained after January 31, 2003. This Interpretation applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company is evaluating whether its unconsolidated joint ventures will be deemed Variable Interest Entities; however this is not expected to have a material impact on the consolidated financial statements.

      The Company has adopted plans to dispose of or terminate leases on 136 residences with an aggregate capacity of 6,150 residents and 33 parcels of land, of which 109 residences representing 4,822 resident capacity have either been sold or transferred to a new lessee as of March 31, 2003. In addition, the Company sold 21 land parcels and transitioned ownership of 3 residences through deed-in-lieu foreclosure transactions. Residences included in the disposition plan were identified based on an assessment of a variety of factors, including geographic location, residence size, operating performance and lender negotiations. As of March 31, 2003, approximately $54.7 million is reserved for losses relating to future asset sales or lease terminations.

In accordance with the SFAS No. 121 and SFAS No. 144 the Company has recorded an impairment loss on its properties to be held for sale whenever their carrying value cannot be fully recovered through the estimated cashflows including net sale proceeds. The amount of the impairment loss to be recognized is the difference between the residence's carrying value and the residence's estimated fair value less costs to sell. The Company's policy is to consider a residence to be held for sale or disposition when the Company has committed to a plan to sell such residence and active marketing activity has commenced or it is expected to commence in the near term. Also in accordance with SFAS No. 144, the impairment loss and revenues and expenses of those residences identified as a disposition asset beginning in January 2002 have been recorded as discontinued operations. Assets held for sale is principally comprised of net property and equipment, goodwill and the corresponding mortgage liability. We expect to sel l these residences and land parcels in the next six to twelve months.

The following table represents operating information (in thousands) included in the loss on discontinued operations for the three months ended March 31, 2003 and 2002, respectively, in accordance with SFAS No. 144 of the Consolidated Statements of Operations of the Company:

      There are a number of factors that may affect the timing of a sale and the sale price that will ultimately be achieved for these residences, including, among other things, the following: potential increased competition from any other assisted living residences in the area, the relative attractiveness of assisted living residences for investment purposes, interest rates, the actual operations of the residence, the ability to retain existing residents and attract new residents at the residence and a buyout of joint venture interests. As a result, there is no assurance as to what price will ultimately be obtained upon a sale of these residences or the timing of such a sale. The value of the assets held for sale, net of reserves, is reflected in current assets and the outstanding debt related to the assets held for sale is reflected in current liabilities on our balance sheet.

5. Liabilities Subject to Compromise

      Under bankruptcy law, actions by creditors to collect indebtedness we owe prior to the Petition Date are stayed and certain other pre-petition contractual obligations may not be enforced against the Company. We have received approval from the Bankruptcy Court to pay certain pre-petition liabilities including employee salaries, wages and benefits and certain vendors critical to the ongoing operations of the Company. Except for certain secured debt and financing lease obligations, all pre-petition liabilities have been classified as liabilities subject to compromise in the unaudited Consolidated Balance Sheet. Adjustments to these claims may result from negotiations, payments authorized by the Bankruptcy Court order, additional rejection of executory contracts or other events.

      Pursuant to an order of the Bankruptcy Court, the Company mailed notices to all known creditors to inform them that the deadline for filing proofs of claim with the Court is July 8, 2003. Amounts that we have recorded may be different than the amounts filed by our creditors. The number and amount of allowable claims cannot be presently ascertained. The claims reconciliation process may result in adjustments to allowable claims.

The following table summarizes the components of liabilities subject to compromise in our unaudited Consolidated Balance Sheets as of March 31, 2003 and proforma December 31, 2002 (in thousands):

      The following table summarizes the computation of basic and diluted net loss per share amounts presented in the accompanying consolidated statements of operations (in thousands, except per share data):